Multifamily Keeps Firing on All Cylinders

Posted on October 26, 2015

WASHINGTON, DC—The apartment market continues to grow nationally, judging by the latest quarterly results from the National Multifamily Housing Council, which on Friday reported increases in all four of its indices. However, Real Capital Analytics’ latest quarterly report on the sector suggests that growth in all one of those metrics—sales volume—is starting to mature.

NMHC’s Quarterly Survey of Apartment Market Conditions for the third quarter produced scores above the break-even level of 50, thus indicating growth over the past three months. Consumer demand as measured by the Market Tightness Index came in at 53, as did the Sales Volume Index. The survey’s Equity Financing Index measured 52, while the Debt Financing Index came in at 54.

“The strong apartment industry run-up shows no signs of ebbing any time soon,” says Mark Obrinsky, NMHC’s SVP of research and chief economist. “Markets remain pretty tight, even as new apartment construction continues to increase.”

While the indices each showed improvement in market conditions during Q3, the rate of improvement, as well as the comparison to previous quarters, varied among the four. The Market Tightness Index came in lower than that of Q2, which measured 61, as well as Q1 at 58.

However, an analysis of quarterly results over the past four years shows that the results seen thus far in 2015 follow a general trend for this index: higher scores in Q1 and Q2, followed by a falling-off in Q3. The high watermark for quarterly improvement over the past 16 quarters was in Q2 2012, when the Market Tightness Index measured 76.

While consumer demand has been above the break-even mark for all but three of the past 16 quarters, and has shown increases for the past seven quarters, it’s a different story for the Sales Volume Index. This index has been negative territory for five quarters since Q4 of ’12, including three consecutive quarters between Q2 and Q4 of 2013.

The most recent quarter’s measure was unchanged from Q2, and the percentage responses to the question of whether sales volume was higher, lower or unchanged from Q2 were also similar to the previous quarter. Twenty-eight percent said sales were higher in Q3, the same percentage that gave that response for Q2.

RCA’s Q3 report on the multifamily sector notes that sales of properties and portfolios priced at $2.5 million or greater were down 11 year-over-year in September on sales of $11 billion. “This decline comes on the heels of a slow­down since May in the growth in sales volume for the apartment sector,” according to RCA.

Growth in pricing is “maturing,” as well, RCA says. “What had been double-digit price growth is slowing to more modest single digit activity. In the current market, investors are now dealing with underwriting acquisitions in the face of growing competition from construction. Had prices continued growing at the double-digit pace, this competition would likely be more challenging.”

That dovetails with the NMHC quarterly survey’s special question, this time asking about construction activity. There were more than twice as many respondents, or 35%, who said they’re seeing more construction activity in local markets they watch than those who reported slower activity (14%). 51% said construction activity in their markets was similar to three months ago.

The other two indices rose out of negative territory during Q3. The Equity Financing Index rose by three points to 52, while the Debt Financing Index bounced back even more dramatically, rising 19 points to 54.